{"id":229413,"date":"2020-05-13T11:00:54","date_gmt":"2020-05-13T05:30:54","guid":{"rendered":"https:\/\/www.scconline.com\/blog\/?p=229413"},"modified":"2020-07-14T20:24:47","modified_gmt":"2020-07-14T14:54:47","slug":"fdi-policy-introduction-and-changes","status":"publish","type":"post","link":"https:\/\/www.scconline.com\/blog\/post\/2020\/05\/13\/fdi-policy-introduction-and-changes\/","title":{"rendered":"FDI Policy \u2013 Introduction and Changes"},"content":{"rendered":"

The Government of India recently made changes to its Foreign Direct Investment Policy (FDI Policy\/FDI) given the COVID-19 pandemic and the ongoing market volatility, sell offs etc., and the general economic turndown. Responding to fears that foreign investors rake up on shares of ailing companies with diminished valuations during this period, the changes seek to regulate investments from certain identified countries. <\/span><\/p>\n

In this article, we explore the regulatory setup of FDI in India, effect of the present changes and compliance requirements that arise due to these changes. <\/span><\/p>\n

Regulatory Framework of FDI in India<\/b><\/span><\/p>\n

FDI is a policy decision of the Government of India, under the aegis of the Department for Promotion of Industry and International Trade (\u2018DPIIT\u2019), Ministry of Commerce & Industry. <\/span><\/p>\n

FDI policies are introduced and modified through Press Notes\/Press Releases, as notified by Reserve Bank of India (RBI). Essentially, these are amendments to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 (\u2018the TISPRO Regulations\u2019) or the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019. These notifications take effect from the date of issue of Press Notes\/Press Releases, unless specified otherwise therein. <\/span><\/p>\n

In case of any conflict, the relevant Foreign Exchange Management Act, 1999 (\u201cFEMA\u201d) notification will prevail. The procedural instructions are issued by RBI by way of circulars. The regulatory framework, over a period, thus, consists of Acts, Regulations, Press Notes, Press Releases, Clarifications, etc.<\/span><\/p>\n

Sector wise Regulations<\/b><\/span><\/p>\n

FDI in India is prohibited for activities which fall under the Prohibited Sector<\/i> (atomic energy, railway operations, gambling and betting, chit funds, real estate, manufacture of tobacco products etc.). The intention behind such prohibition is to ensure FDI is restricted for sensitive sectors that concern national security, defence etc. <\/span><\/p>\n

FDI is permitted in certain sectors under Automatic Route<\/i><\/span> <\/b>up to 100% (for e.g. IT sector). Under this route, no prior permission is required from the Government of India, before investments are brought in. <\/span><\/p>\n

The other route is Government Approval Route<\/i>, wherein permission from the DIPP or relevant regulator is required to bring in FDI. Permitted sectoral caps are also provided in the <\/span><\/p>\n

Policy for any FDI which falls under the category of Approval Route. For instance, in the banking sector, 49% FDI is permitted under Automatic Route and FDI up to 74% is permitted under Government Approval Route.<\/span><\/p>\n

Changes implemented vide Press Note 3 (2020 Series) dated April 17, 2020<\/b><\/span><\/p>\n

The DPIIT, issued a Press Note (No. 3) on April 17, 2020 (\u2018PN3\u2019) which alters<\/i> Para 3.1.1 of the Consolidated FDI Policy, 2017. The extant FDI Policy was reviewed with an intention to curb opportunistic takeovers\/acquisitions of Indian companies due to the current COVID-19 pandemic. <\/span><\/p>\n

The Consolidated FDI Policy, 2017 (\u201cCon FDI Policy\u201d) earlier restricted Bangladesh and Pakistan from investing in India. Any person from these countries could invest in India only after obtaining prior permission of the Government of India, through the Government Approval Route. <\/span><\/p>\n

Para 3.1.1 as it stood till Press Note 3 (2020 Series) <\/i><\/b><\/span><\/p>\n

A non-resident entity can invest in India, subject to the FDI Policy except in those sectors\/activities which are prohibited. However, a citizen of Bangladesh or an entity incorporated in Bangladesh can invest only under the Government route. Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors\/activities other than defence, space, atomic energy and sectors\/activities prohibited for foreign investment.<\/i><\/span><\/p>\n

Press Note 3, dated 17-4-2020 extends the Government Approval route to all countries that share a land border with India. In effect, five other nations, i.e. Afghanistan, Bhutan, China, Myanmar and Nepal, in addition to Pakistan and Bangladesh, are also subject to restrictions under the FDI Policy, through Government Approval Route. In effect, investment from these seven nations can be made in India only by obtaining prior permission with the Government of India, and is subject to the Sectoral Cap under extant FDI Policy.\u00a0<\/span><\/p>\n

Revised Position: Press Note 3 (2020 Series)<\/i><\/b><\/span><\/p>\n

Para 3.1.1: 3.1.1(a) A non-resident entity can invest in India, subject to the FDI Policy except in those sectors\/activities which are prohibited. However, an entity of a country, which shares land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, can invest only under the Government route. Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors\/activities other than defence, space, atomic energy and sectors\/activities prohibited for foreign investment.<\/i><\/span><\/p>\n

Beneficial Ownership (\u2018BO\u2019)<\/b><\/span><\/p>\n

Through PN3, the Government has also introduced the aspect of transfer of BO of any existing or future FDI in an entity in India. It provides that where the transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly results in BO, which falls under the restrictions imposed in Para 3.1.1(a) of the FDI Policy (i.e. if the investor belongs to any one of the seven countries), such change in the BO will also require Government approval.<\/span><\/p>\n

Revised Position: Press Note\u00a0 <\/span>3 (2020 Series)<\/i><\/b><\/span><\/p>\n

3.1.1(b) In the event of the transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership falling within the restriction\/purview of Para 3.1.1(a), such subsequent change in beneficial ownership will also require Government approval.<\/i><\/span><\/p>\n

Concept of Beneficial Ownership, Beneficial Interest and Significant Beneficial Ownership<\/b><\/span><\/p>\n

BO is not defined under the FDI Policy. The term \u2018Beneficial Ownership\u2019 is only defined under <\/span>Section 2(fa) of the Prevention of Money Laundering Act, 2002 and reads as under:<\/span><\/p>\n

\u201cAn individual who ultimately owns or controls a client of a reporting entity or the person on whose behalf a transaction is being conducted and includes a person who exercises ultimate effective control over a juridical person<\/i>.\u201d<\/span><\/p>\n

Further, Section 89 of the Companies Act, 2013 read with the Companies (Management and administration) Rules, 2014 (2018 amendment<\/i>) provides for the distinction between legal owners and beneficial owners of shares having Beneficial Interest (\u201cBI\u201d),\u00a0 <\/span>to include any direct or indirect right or entitlement in a share through any contract or arrangement or otherwise to the rights attached with the share or receive dividend on its distribution. Any change in BI needs to be reported by the Company to the regulator, Ministry of Corporate Affairs (\u201cMCA\u201d).<\/span><\/p>\n

Additionally, Section 90 of the Companies Act, 2013 read with the Companies (Significant Beneficial Owners) Rules, 2018, brings out the concept of the Significant Beneficial Ownership (\u2018SBO\u2019) and states that whenever there is change in SBO, the Companies need to report to the MCA about the SBO. In order to ascertain the SBO, the following points need to be considered to ascertain if there is any reporting requirement or not:<\/span><\/p>\n

    \n
  1. Identify if there are any indirect holding through a body corporate, LLP, Partnership, Trust, HUF;<\/span><\/li>\n
  2. If individual holding is 10% or more in the Company, the company needs to report to the MCA;<\/span><\/li>\n
  3. If individual shareholding, voting rights, dividend right exceeds 10%, SBO needs to be reported to MCA.<\/span><\/li>\n<\/ol>\n

    On examination of the records available on MCA, RBI and the regulatory authority, will have a fair idea about the investments made by the neighbouring country through Automatic Route. Any changes in the SBO or the BI will now require in addition to reporting to MCA, an in-principle approval from the DPIIT or the approval from the relevant authority under the\u00a0 <\/span>Government of India.<\/span><\/p>\n

    Conclusion <\/b><\/span><\/p>\n

    Indian entities have been significantly benefited by the investments made by or neighbouring countries, especially FDI from China. According to sources[1]<\/strong><\/a>, Chinese FDI into India is approximately $6.2 billion, there is significant investments in start-ups.<\/span><\/p>\n

    This policy of the Government does not impact the existing investments made in India. There will be closer look at the investments that the country receives from the neighbouring countries due to the volatility in the market as a result of the COVID-19 pandemic.<\/span><\/p>\n

    These amendments will be effective once the requisite amendments are made to Rule 6 of the FEMA (Non-Debt Instruments) Rules, 2019. Any direct or indirect transfer of ownership of any existing FDI in the Indian entity which is more than 10% will have to be reported both to the MCA and to the exchange control regulator, RBI.<\/span><\/p>\n

    The impact on the economy, especially with this pandemic COVID \u201319, particularly on the start-ups is unknown. It is possible that that there will be closer inspection on the all FDIs. In respect of FDIs from neighbouring nations, since such investments now require prior approval from the Government i.e. Approval Route, and since Government Approval for FDI will requires significant amount of time, it is expected that the Companies expecting such FDI should be prepared for delays in receiving investments which is likely to have implications for future investments by venture capital funds, especially the start-ups that have seen significant investments from Chinese investors. The impact on the country\u2019s GDP in view of this policy decision is very unclear at this stage.\u00a0 <\/span>
    \n<\/span><\/p>\n

    \n

    *Advocate, Shivadass & Shivadass (Law Chambers)<\/span><\/p>\n

    [1]<\/a> https:\/\/www.thehindubusinessline.com\/info-tech\/how-china-dominates-tech-investments-in-india\/article31380773.ece<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

    by Hari Prasad MS*<\/p>\n","protected":false},"author":8808,"featured_media":178654,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[42503,1191],"tags":[39924,41308,41306,33600,41305,39426,2611,41307],"class_list":["post-229413","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-legal-analysis","category-op-ed","tag-covid-19","tag-department-for-promotion-of-industry-and-international-trade","tag-economic-turndown","tag-fdi-policy","tag-foreign-direct-investment","tag-gdp","tag-RBI","tag-significant-beneficial-ownership"],"yoast_head":"\nFDI Policy \u2013 Introduction and Changes | SCC Times<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" 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These are intended to liberalise and simplify the FDI policy so as to provide ease of doing business in the country. In turn, it will lead to larger FDI inflows contributing to growth of\u2026","rel":"","context":"In "Hot Off The Press"","block_context":{"text":"Hot Off The Press","link":"https:\/\/www.scconline.com\/blog\/post\/category\/news\/hot_off_the_press\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":133521,"url":"https:\/\/www.scconline.com\/blog\/post\/2017\/05\/25\/cabinet-approves-phasing-out-foreign-investment-promotion-board\/","url_meta":{"origin":229413,"position":1},"title":"Cabinet approves phasing out Foreign Investment Promotion Board","author":"Saba","date":"May 25, 2017","format":false,"excerpt":"The Union Cabinet \u00a0has given its approval to the phasing out of Foreign Investment Promotion Board (FIPB). The proposal entails abolishing the FIPB and allowing administrative Ministries\/Departments to process applications for FDI requiring government approval.\u00a0Henceforth, the work relating to processing of applications for FDI and approval of the Government thereon\u2026","rel":"","context":"In "Hot Off The Press"","block_context":{"text":"Hot Off The Press","link":"https:\/\/www.scconline.com\/blog\/post\/category\/news\/hot_off_the_press\/"},"img":{"alt_text":"","src":"https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2015\/12\/DSC_4762-e1474523869607.jpg?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2015\/12\/DSC_4762-e1474523869607.jpg?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2015\/12\/DSC_4762-e1474523869607.jpg?resize=525%2C300&ssl=1 1.5x, https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2015\/12\/DSC_4762-e1474523869607.jpg?resize=700%2C400&ssl=1 2x, https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2015\/12\/DSC_4762-e1474523869607.jpg?resize=1050%2C600&ssl=1 3x"},"classes":[]},{"id":226522,"url":"https:\/\/www.scconline.com\/blog\/post\/2020\/03\/04\/cabinet-approves-the-foreign-direct-investment-policy-on-civil-aviation\/","url_meta":{"origin":229413,"position":2},"title":"Cabinet approves — Foreign Direct Investment policy on Civil Aviation","author":"Bhumika Indulia","date":"March 4, 2020","format":false,"excerpt":"To permit foreign investment upto 100% by those NRIs, who are Indian Nationals, in case of M\/s Air India Ltd., the Union Cabinet approved to amend the extant FDI Policy to permit Foreign Investment (s) in M\/s Air India Ltd by NRIs, who are Indian Nationals, upto to 100% under\u2026","rel":"","context":"In "Cabinet Decisions"","block_context":{"text":"Cabinet Decisions","link":"https:\/\/www.scconline.com\/blog\/post\/category\/legislationupdates\/cabinet_decisions\/"},"img":{"alt_text":"","src":"https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2017\/12\/FDI.jpg?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2017\/12\/FDI.jpg?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2017\/12\/FDI.jpg?resize=525%2C300&ssl=1 1.5x, https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2017\/12\/FDI.jpg?resize=700%2C400&ssl=1 2x, https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2017\/12\/FDI.jpg?resize=1050%2C600&ssl=1 3x"},"classes":[]},{"id":238428,"url":"https:\/\/www.scconline.com\/blog\/post\/2020\/11\/03\/foreign-direct-policy-fdi-consolidated-fdi-policy-2020-read-the-key-aspects\/","url_meta":{"origin":229413,"position":3},"title":"Foreign Direct Policy (FDI) | Consolidated FDI Policy, 2020: Read the Key Aspects","author":"Editor","date":"November 3, 2020","format":false,"excerpt":"Foreign Direct Investment (FDI) is considered as a major source of non-debt financial resource for economic development. FDI flows into India have grown consistently since liberalization and are an important component of foreign capital since FDI infuses long term sustainable capital in the economy and contributes towards technology transfer, development\u2026","rel":"","context":"In "Legislation Updates"","block_context":{"text":"Legislation Updates","link":"https:\/\/www.scconline.com\/blog\/post\/category\/legislationupdates\/"},"img":{"alt_text":"","src":"https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2020\/11\/fdi-2.jpg?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2020\/11\/fdi-2.jpg?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2020\/11\/fdi-2.jpg?resize=525%2C300&ssl=1 1.5x, https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2020\/11\/fdi-2.jpg?resize=700%2C400&ssl=1 2x, https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2020\/11\/fdi-2.jpg?resize=1050%2C600&ssl=1 3x"},"classes":[]},{"id":343526,"url":"https:\/\/www.scconline.com\/blog\/post\/2025\/03\/12\/understanding-foreign-investment-norms-space-sector\/","url_meta":{"origin":229413,"position":4},"title":"Understanding Foreign Investment Norms in the Space Sector","author":"Bhumika Indulia","date":"March 12, 2025","format":false,"excerpt":"by Udayarkar Rangarajan* and Prerna Ranjan**","rel":"","context":"In "Experts Corner"","block_context":{"text":"Experts Corner","link":"https:\/\/www.scconline.com\/blog\/post\/category\/experts_corner\/"},"img":{"alt_text":"FDI Norms in Space Sector","src":"https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2025\/03\/FDI-Norms-in-Space-Sector.webp?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2025\/03\/FDI-Norms-in-Space-Sector.webp?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2025\/03\/FDI-Norms-in-Space-Sector.webp?resize=525%2C300&ssl=1 1.5x, https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2025\/03\/FDI-Norms-in-Space-Sector.webp?resize=700%2C400&ssl=1 2x"},"classes":[]},{"id":228467,"url":"https:\/\/www.scconline.com\/blog\/post\/2020\/04\/18\/government-amends-extant-fdi-policy-for-curbing-opportunistic-takeovers-acquisitions-of-indian-companies-in-view-of-covid-19-pandemic\/","url_meta":{"origin":229413,"position":5},"title":"Government amends — extant FDI policy for curbing opportunistic takeovers\/acquisitions of Indian companies in view of COVID-19 pandemic","author":"Bhumika Indulia","date":"April 18, 2020","format":false,"excerpt":"Government of India has reviewed the extant Foreign Direct Investment(FDI) policy for curbing opportunistic takeovers\/acquisitions of Indian companies due to the current COVID-19 pandemic and amended para 3.1.1 of extant FDI policy as contained in Consolidated FDI Policy, 2017. Department for Promotion of Industry and Internal Trade, Ministry of Commerce\u2026","rel":"","context":"In "Legislation Updates"","block_context":{"text":"Legislation Updates","link":"https:\/\/www.scconline.com\/blog\/post\/category\/legislationupdates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]}],"amp_enabled":true,"_links":{"self":[{"href":"https:\/\/www.scconline.com\/blog\/wp-json\/wp\/v2\/posts\/229413","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.scconline.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.scconline.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.scconline.com\/blog\/wp-json\/wp\/v2\/users\/8808"}],"replies":[{"embeddable":true,"href":"https:\/\/www.scconline.com\/blog\/wp-json\/wp\/v2\/comments?post=229413"}],"version-history":[{"count":0,"href":"https:\/\/www.scconline.com\/blog\/wp-json\/wp\/v2\/posts\/229413\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.scconline.com\/blog\/wp-json\/wp\/v2\/media\/178654"}],"wp:attachment":[{"href":"https:\/\/www.scconline.com\/blog\/wp-json\/wp\/v2\/media?parent=229413"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.scconline.com\/blog\/wp-json\/wp\/v2\/categories?post=229413"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.scconline.com\/blog\/wp-json\/wp\/v2\/tags?post=229413"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}